Thursday, April 9, 2015

Serbia cuts rate 50 bps to boost inflation expectations

Serbia's central bank cut its key policy rate by a further 50 basis points to 7.0 percent to shore up declining inflationary expectations and curb persistent disinflationary pressures from low demand.
The Bank of Serbia (NBS), which has now cut its rate by 100 basis points this year following a cut in March, added that rising global liquidity from the European Central Bank's quantitative easing, along with the consistent implementation of fiscal consolidation and structural reforms, had stirred up investors' interest in Serbia.
Like many central banks, Serbia's central bank has in the past year considered the risk of capital outflows when setting policy rates.
Serbia's inflation rate rose to 0.8 percent in February from a historical low of 0.1 percent in January and the central bank repeated that it still expects inflation to return to its tolerance range in the second half of this year due to past policy, the waning impact of disinflationary factors, muted growth in administered prices and low prices of commodities.
The NBS targets inflation at a midpoint of 4.5 percent in a range from 2.5 to 5.5 percent.

The Bank of Serbia issued the following statement:

"In consideration of the current economic trends and forecasts for the coming period, the NBS Executive Board decided in today's meeting to cut the key policy rate by 0.5 percentage points, to 7 percent.

Apart from low inflation, continued monetary easing was motivated also by a further decline in inflation expectations, which have lingered within the target band for over a year now, and persisting disinflationary pressures stemming from low aggregate demand. Furthermore, low inflation rates, even negative ones, are seen across the international environment. In the Executive Board's judgment, the arrangement with the IMF confirms the economic policy makers’ commitment toward a long-term sustainable recovery of the domestic economy. Global liquidity is increasing in response to the ECB’s quantitative easing, which along with consistent implementation of fiscal consolidation and structural reforms stirs up investors’ interest in Serbia.

Furthermore, consumer price growth recorded since the start of 2015 has been conditioned by one-off factors, notably by the fruit and vegetable price hike. It does not reflect a rise in inflationary pressures, as confirmed by low core inflation. Inflation is expected to return within the target tolerance band in the second half of the year, on the back of past monetary policy measures and the depletion of the effect of temporary disinflationary factors, primarily muted administered price growth and low prices of primary commodities in the world and domestic markets.